Chapter 7 Customer Order and Account Management Business Processes

Presentation Outline Sales Order Processing Cash Received on Account Other Account Receivable Processing Lock-Box Collection Systems Cash Sales

I. Sales Order Processing Order Entry Credit Approval Finished Goods Shipping Billing Accounts Receivable General Ledger

A. Order Entry Customer order is input into the order database to create an order. Master price list is consulted to determine management approved prices. Order database is updated with pricing information. Sales order is generated. Customer Order Enter Order Create Order Order Database Master Price List Sales

B. Credit Approval New sales orders are retrieved for sales on account. Credit department evaluates new customers using a credit check. Predetermined credit limits often provide general authorization for established customers. Credit authorization must be separated from sales order department to minimize sales to high risk customers. Sales order will not be approved until credit is approved. Order Database Retrieve New Orders Sales Approve Credit Processing Files Approved

C. Finished Goods Order Database Prepare Picking List Pick Delivery Processing Inventory Picking List With Goods To Shipping A picking list is prepared for approved sales orders in order to identify goods to be selected from finished goods. The order is picked using the picking list. Inventory records and the order database are updated. Picking list accompanies goods to shipping. Shipping should acknowledge receipt of goods transferred.

The order database is updated. From Finished Goods Picking List With Goods Order Database Packing List Match Sales Order Delivery Processing Packing List Bill of Lading To Customer D. Shipping Shipping accepts the order for shipment after matching the order per the picking list from finished goods with the packing list input from order entry and approved by the credit dept. The order database is updated. A bill of lading is prepared to document the agreement with the shipper (See Figure 7.5 on page 250) Copies of the packing list and bill of lading are usually included with the customer’s order when it is shipped.

E. Billing Order Database Billing List Prepare Invoice Processing To Customer Periodically Journal Entry Voucher To General Ledger Billing completes the order process by preparing invoices for orders on the billing list. Invoice is recorded in the sales journal, and notice is sent to accounts receivable to update individual customer accounts. Periodically, a journal voucher is prepared and forwarded to general ledger in order up update the control account for accounts receivable.

F. Accounts Receivable Order Database Prepare Posting List Invoice Review Post Accounts Receivable Ledger Control Total To General Ledger Statements To Customers A summary of invoiced orders in the order database is used to prepare an invoice posting list to update individual customer accounts for purchases. A summary of the total of the postings to individual customer accounts (control total) is sent to general ledger. Billing does not have access to the account receivable ledger. Accounts receivable also sends periodic customer statements.

From Accounts Receivable G. General Ledger Control Total From Accounts Receivable Journal Voucher From Billing Compare Post General Ledger Processing General ledger compares the total sales invoiced from billing to the total sales posted to individual customer accounts from accounts receivable. These amounts must match before the control accounting for accounts receivable in the general ledger is updated. The total is posted as a debit to accounts receivable (control account in the general ledger) and a credit to sales.

II. Cash Received on Account Mailroom Cash Receipts Accounts Receivable General Ledger Internal Audit and the Bank Reconciliation Note: Flowcharts in this section may not contain some aspects of the figures that they represent from the text. Space considerations required an abbreviated version on the slides. Please see the text for the complete diagrams.

From Customers Remittances on Account Open Mail Remittance Advices Checks 2 1 List Prepare Forward to Accounts Receivable B Restrictlively Endorse and Total Control Total Cash Receipts A A. Mailroom Record keeping and custody of asset responsibilities are separated by having checks and remittance advices separated in the mailroom

A From Mailroom Checks Remittance List Control Total From Cash Sales Prepare Deposit Slip Approve Receipts Intact C To Bank Post Receipts And Prepare Journal Voucher Forward to General Ledger D To General Ledger B. Cash Receipts Deposit is completed and journal voucher is sent to general ledger (Debit - Accounts Receivable and Credit - Sales).

B From Mailroom Remittance Advices List Post to Customer Accounts Receivable Ledger Total Postings Control Total Approve Forward to General D C. Accounts Receivable Remittance advices are used to update the accounts receivable subsidiary ledger. A control total is forwarded to General Ledger.

D. General Ledger Control Total E From Accounts Receivable D From Cash Receipts Journal Voucher Compare Totals and Post General Ledger General Ledger compares the journal entry (Debit – Cash and Credit – Accounts Receivable) per the journal voucher from cash receipts, with the total credits to the subsidiary ledger as shown on the control total from accounts receivable. If the totals agree, the journal entry is posted into the general ledger.

E. Internal Audit and The Bank Reconciliation From Cash Receipts Deposit Slip Deposited Cash Checks Validate File Statement Reconcile Internal audit performs an independent reconciliation of the bank account.

III. Other Account Receivable Processing Sales Returns Sales Allowances Write-off of Accounts Receivable Note: Flowcharts in this section may not contain some aspects of the figures that they represent from the text. Space considerations required an abbreviated version on the slides. Please see the text for the complete diagrams.

Post customer accounts A. Sales Returns A sales return occurs when a customer actually returns goods that have been shipped. Full credit is usually granted to the customer. Customer Receiving Credit Billing Accounts Receivable General Ledger Sales Return Memo Approve sales return Returned goods Prepare and journalize credit memo upon receipt of approved sales return memo Post customer accounts Journal Voucher Control Total

B. Sales Allowances Allowances occur because of damaged merchandise, shortages in shipments, clerical errors, etc. Amount of allowance is negotiated with customer. Allowance is reviewed and approved by an independent party (usually the credit department). Credit department forwards approved sales allowance memo to billing. Billing prepares a credit memo for the allowance. The handling the credit memo is the same as for credit memos for sales returns. (see prior slide)

C. Write-off of Accounts Receivable The central feature in a write-off process is an analysis of past due accounts. 3 Treasurer Credit Accounts Receivable General Ledger Internal Audit Aged Trial Balance 2 1 Write-Off Memo File Post Worthless Account List Confirm Customer Write-off Notification Independent Approval Control Total Periodically confirm & post

IV. Lock-Box Collection Systems 1. Customer mails payment directly to seller’s bank. 3. Seller receives customer names and payment details from the bank. 2. Bank receives check and begins processing. A lock-box system reduces float by having checks deposited to a firm’s account before the firm processes them. Savings of lost interest can be significant when interest rates are high.

V. Cash Sales Unlike cash collections on account, cash sales have no prior record of occurrence. It is imperative that the sale be recorded so that any shortage of cash will be noticed. Customer audit is a general term used to describe procedures in which the customer acts as a control over the initial documentation of a transaction. Examples include: Pricing items so that customers expect change. Awarding prices for certain receipts. No charge if a receipt is not offered.

Summary Sales Order Processing The Accounts Receivable System Write-off of Accounts Receivable Lock-Box Collection System Customer Audit of Cash Sales